- August was a difficult month for the equity markets, with the S&P 500 down 2.66% and the MSCI EAFE index down 2.77%. It was an even worse month for riskier assets: small company stocks (Russell 2000 index) was down more than 5%, as were Emerging Market stocks. (Morningstar). As “risk assets” were being punished, “safe haven” assets were rallying. Long term treasury bonds were up more than 11% and gold and gold miners were up 7.15 and 7.63%, respectively (Morningstar).
- Our tactical strategies performed very well in August. Gold, Gold Miners and Treasuries had established strong momentum going into the month. As a result, our Momentum strategy benefited from being invested exclusively in those assets. As market breadth suggested heightened risk in the market, our Risk Managed Momentum Strategy moved to “safe” assets and was invested entirely in long term treasuries.
INVESTMENT STRATEGY REVIEW
- Our All Weather strategy allocates investments into seventeen asset classes that together have produced consistent results in a variety of economic environments. We analyze the trend of each asset class and invest if and only if its asset class closes above its 200 day moving average at month end. Funds that are not invested are moved to cash. For September, managed futures crossed above while domestic small cap and emerging market equities crossed below their respective 200 day moving averages. As a result, we moved 4.5% of the portfolio value out of the strategy and into cash. The portfolios are now holding 21% of their total value in cash.
- Our Momentum strategy incorporates both absolute and relative momentum. It invests evenly in the three asset classes that are above their 200 day moving averages (“absolute momentum”) and exhibiting the most momentum at the end of each month (“relative momentum”). For this portfolio we define momentum as the average of the index’s latest 1, 3, 6 and 12 months total return. For September, following a very strong performance from all three of the asset classes we held in August, the strategy remains invested in gold, gold miners and long term treasuries.
- Our Risk Managed Momentum strategy is a dual-momentum based investment strategy with vigorous “crash” protection and a fast momentum filter. The strategy employs a set of “canary” assets whose momentum dictates whether the strategy is “offensive” or “defensive” in that month. If any of the canary assets shows negative momentum, the strategy becomes defensive for the month and moves into the one bond asset with the most momentum. If the strategy is offensive, it invests in the three asset classes with the highest momentum. For this strategy, momentum is calculated by taking the 1, 3. 6 and 12 month trailing returns and multiplying by 12/19, 4/19, 2/19 and 1//9, respectively. For September, multiple “canary” assets again exhibited negative momentum, keeping the strategy in our single defensive asset class experiencing the greatest momentum. The strategy will remain fully invested in long term treasuries.
To view our full September 2019 Tactical Strategies report: